SEC Probes Electronic Exchange and Trading Firm Affiliations

Discussion in 'Wall St. News' started by Options12, Feb 26, 2012.

  1. Options12

    Options12 Guest

    BATS Global Markets Inc, a U.S. exchange operator that is planning an initial public offering, said in a government filing cited by the Journal that it got a request from the U.S. regulator's enforcement division for information on the use of order types and its communications with certain market participants.

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    U.S. regulators have launched an inquiry into the ties between stock exchanges and certain electronic-trading firms, according to people familiar with the matter.

    Aspects of the probe, which is in its early stages, came to light in a regulatory filing Friday from BATS Global Markets Inc., a computer-driven U.S. exchange that is planning an initial public offering. BATS said in the filing that it had received a request from the Securities and Exchange Commission's enforcement division for information related to "the use of order types, and our communications with certain market participants."

    While detailed routing and trading instructions, known as "order types," are relatively obscure, they lie at the heart of how exchanges work. Traders and investors use order types to give exchanges instructions for how their bids and offers should be treated within the exchange. Market orders, for instance, direct the exchange to buy immediately, while limit orders tell the exchange to buy or sell within certain price ranges.

    But exchanges also offer far more sophisticated order types, most of which are used almost exclusively by computer-driven firms, observers say. The orders allow firms to hide orders and keep them from routing to other exchanges, for instance. Some critics argue that these complex order types give traders significant advantages over investors using less sophisticated orders.

    The SEC also asked BATS for details about its information-technology systems and trading strategies, according to the filing. BATS said the probe also is focusing on communications it has had with "certain of our members affiliated with certain of our stockholders and directors." SEC spokesman John Nester declined to comment on the inquiry.

    The SEC in the past year has been ramping up its scrutiny of high-frequency trading, in which firms often hold stocks for fractions of a second. The SEC is probing the algorithms the firms use to trade and other aspects of how they operate. The agency is now focusing on how those trading systems interact with the computerized matching engines at exchanges, according to people familiar with the matter.

    Investors in BATS, based in Lenexa, Kan., include several large banks, as well as electronic-trading firms Getco LLC and Tradebot Systems Inc. BATS was founded in 2005 by Dave Cummings and a dozen former employees of Tradebot. Mr. Cummings is chairman of Tradebot. A spokesman for Getco didn't immediately respond to a request for comment. Mr. Cummings declined to comment.

    The investigation is "in the early stages and we are cooperating with the staff," the BATS filing stated. BATS spokesman Randy Williams declined to comment on the filing, citing the company's quiet period before the planned IPO. The SEC examination also includes other exchanges, according to people familiar with the matter.

    SEC Chairman Mary Schapiro said Wednesday in a Washington, D.C., breakfast with reporters that the proliferation of high-speed trading in the stock market "worries me" and that the SEC needs "to have much greater understanding of high-frequency trading."

    The firms cancel the bulk of their orders before replacing them with new orders. High-frequency firms cancel about 95% to 98% of all orders, according to Tabb Group. The SEC is considering whether to place fees on order cancellations.

    Asset managers have become concerned about the impact high-frequency trading is having on the stock market. They say the high number of canceled orders creates confusion, and firms often don't know if the quotes they see on their screens will vanish a second later.

    "There's this underlying feeling that it's become more casino-like, and a casino implies that there's a lack of fairness and transparency, that somebody is card counting," said Andy Brooks, head of U.S. trading for T. Rowe Price Group Inc. "Investors of all types are nervous about the market environment."

    BATS also said it would pay a $100 million dividend to its stakeholders upon completing its IPO. BATS's board on Wednesday approved the planned payout, which will allow the trading firms and banks that have backed the 7-year-old company to cash in on their investment. The dividend was detailed in Thursday's SEC filing in advance of a public float, which market participants expect in late March or early April.

    The electronic-exchange company filed to go public last May via a share sale that would raise $100 million for the market operator. BATS is the third-largest U.S. stock-market operator by trading volume, and it runs the largest pan-European stock market following its acquisition last year of rival platform Chi-X Europe.

    —Jacob Bunge and Jean Eaglesham contributed to this article.
  2. That´s good. Now that the SEC got interested with the ties between exchanges and HF trading firms, it will soon or late end in some regulation that will , at least, put a brake in this HFT golden age.
  3. emg


    u can't stop technology. Higher educated traders will find another way to make money if the gov decides to regulate HFT.
  4. ammo


    or they will go thru the motions, do nothing, and find another bernie madoff or martha stewart ,run weeks of press on it,to show they are on the ball
  5. Nobody has nothing against smart people making money, but when it just do damage to others, it has to go. It happened in the past (pools, etc) and it will happen again, just wait for a deep enough crisis that will force the government to find someone to blame for it (HFT make them money, but it´s not their main business, so they will just sacrifice it).

    But that´s the fall under his own weight scenario. Personally I´m not against actions that would accelerate this.
  6. emg


    Trading is the zero sum game. When somebody wins, the other lose.

    If u are a small trader, u will lose no matter what, and why?

    1) Under capitalized
    2) Low Educated

    If u are a big trader work in the House, u have a better chance of winning the game, and why

    1) Well Capitalized
    20 Higher Educated

    More than 90% of small traders lose. They just lose.
  7. Our life, our economical system and the civilization itself is a zero-sum game, you have always to give something away(and when youre giving it away, someone is receiving the benefits) to have something in reward . The market is just a mirror of that, where there is no fancy word like "taxes, employement, etc" to keep the selfesteem high when losing, that´s the reality.

    Not only 90% of traders lose, 90% of everything in our damn reality is a big FAIL: 90% of marriages, 90% of business, 90% of personal relations, 90% of the things you try to accomplish, 90% of your dreams and hopes, 90% of EVERYTHING.

    I don´t see what has to do your post with all of this. Maybe it helps you to repeat the "losing mantra" to gain equilibrium or something :D

    But like a response it: Education don´t give you anything, just a paper that guarantee that you weren´t dumb enough to not fail some tests. Knowledge can be gathered, connections can be made, capital can be amounted if you have the desire to do it (not the desire to have it, but to do the process itself).

    Now, back to the topic: HFT is damaging EVERYONE, when the damage will gain a critical mass, some big fellow will pull the right strings, and get rid of it. Just time is needed, and as I said before, some deep crisis (that could have passed a lot of time ago if the FED didn´t support the "go nowhere" market", and just let the things develop naturally. (I can be wrong however, maybe the action of the fed is what naturally should happen, but anyway. Only time will tell us if the decision they made in late 80s helped or not).

    P.S. HFT must go :D
  8. Fees on order cancellations that's bullshit.

    I cancel quite a bit of orders during the trading days, so now I will be penalized for it by some dumb tax.

    How is hft hurting people? I have been making money fine and I am not an hft trader.
  9. Fees on cancellation will not hurt you anymore than HFT is hurting you right now. That tax will be infinitesimal and only will be felt by the players that cancel millions of orders every day (hft cancels like 99% of their orders, their volume today is like 40% of the market volume in executed orders only, so you can have an idea of how much do they cancel).

    The degree of damage is measured in less than a cent per transaction. In your case you will only feel the cumulative effect, that will be stronger if you make more volume.

    Think of it like of termites. The damage that they do to your house depends on what is your house made of. If it´s a cheap wooden one, you´ll feel them almost as soon as they appeared. But if youre living in a expencive stone house with some steel, you´ll not feel them, until they´ve multiplied themself to a critical mass, and almost all of your wooden details, walls, etc start falling of.
  10. Except that it doesn't. What really happens is, when you're a fool on the exchange, you get whammed like a oil tanker running over a manatee. Not like a car on a railroad track whose signal is broken.

    Now you're taking your self labeled expert trading knowledge (that is in reality the equivalent of stuffing your closet with used classroom notes and used toilet paper, instead of books) and proclaiming hft as the reason why you and "others" lose. You have far too much arrogance and psychological questions and far too little knowledge or even some successful experience to back up that knowledge. This is why so many people get pissed around here - too many dolts with more arrogance and pride than real knowledge.

    Dumb traders lose, they just lose.
    Small discretionary traders lose, they just lose.
    Stats win, always.
    Learn algo. If you're too damn stupid to know what C++ would look like if it were written on your wall, find another profession.
    #10     Mar 4, 2012